The Indian government has decided to appeal against a $1.2 billion international arbitration award won by Cairn Energy Plc. in a tax dispute and to strongly contest all cases filed by Cairn in various international courts, said a person informed about the development. The move signals the government’s resolve to defend its sovereign rights in taxation.
The government, however, has kept open possibility of a resolution within existing Indian laws, the person said. This indicates the government’s willingness to settle the tax dispute if Cairn choses to do so, under the direct tax dispute settlement scheme Vivad se Vishwas, which gives relief on interest and penalty if the principal tax demand is paid.
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This comes in the wake of Cairn Energy chief executive officer Simon Thomson telling reporters on Thursday after a meeting with finance secretary Ajay Bhushan Pandey and senior officials of the Central Board of Direct Taxes (CBDT) that the dialogue was constructive and that it was ongoing. He had also said the company and its shareholders wanted a quick resolution.
“The government welcomes Cairn’s move to reach out for a resolution. However, any dispute resolution to be sought by Cairn will have to be within already existing laws,” the person said.
“The government will file an appeal against the Cairn arbitration award soon and will contest its sovereign rights to tax. It will also strongly contest other suits filed by Cairn Energy at various other international courts,” the person said.
The government alleges that the offshore transaction executed by Cairn was aimed at evading taxes. The transaction in 2006-07 involving entities in Jersey led to capital gains in the hands of Cairn UK Holdings, which is taxable in India, according to the government.
India earlier raised a tax demand of around Rs104 billion plus an equal amount in penalty and interest accrued. According to Cairn, the Indian government has seized residual shares in Cairn India Ltd, acquired by Vedanta Resources, as well as a tax refund due to the British firm, together amounting to approximately Rs10,570 crore or $1.4 billion. As a result of the international arbitration, the company secured an award of $1.2 billion plus interest and cost, which the government will now contest.
The Indian government also is taking several steps to ensure that the country’s tax base is not eroded, including by introducing an equalisation levy on e-commerce transactions. At present, salaried people, especially those in the middle income category, contribute a big chunk of direct taxes, according to data available with the tax department. As the tax base is finite, letting large corporate transactions escape from taxation would increase the burden on individual tax payers, who, unlike businesses, do not get many tax credits or exemptions.
An email sent to the Union finance ministry seeking a formal response remained unanswered at the time of publishing.